Defective Enterprises

Wall Street’s ‘M&A Follies’: Why the Curtain Never Falls

AOL and Time Warner split, Comcast and NBC join. The merger merry-go-round continues to spin. Investment bankers and corporate execs get to grab the brass ring. The rest of us get pink slips and higher prices.

By Sam Pizzigati

What may be the dumbest corporate merger of all time — the $165 billion deal that saw AOL gobble up Time Warner — has finally ended. AOL last week formally spun off and became a totally separate and independent corporate entity.

The AOL-Time Warner merger, initially brokered back in 2000, had been a disaster for years, by every standard measure of enterprise success. Indeed, the merger had essentially become a joke, a move so excruciatingly wrong-headed that observers from outside could only laugh at the sheer folly behind it.

The yucks started breaking out when execs at the newly merged media giant forced Time Warner-side staff to use AOL’s email system. That email, designed for consumers, bombed totally as a workplace tool. Large attachments crashed the system. Messages vanished. Amazingly, that fun went on for a year.

But the merger would be no joking matter for the thousands of workers who lost their jobs as execs of the new AOL Time Warner rushed after the “synergy” they claimed their merger would surely create.

Actually, the merger may have been more theft than joke. The AOL and Time Warner execs who cut the merger deal ended up laughing all the way to the bank. Time Warner’s numero uno cashed out $153 million in stock option profits in the merger’s first year. AOL’s top gun collected $100 million in the second.

Those windfalls, of course, came as no surprise. Corporate executives, in the modern global economy, don’t cut merger deals to create better companies. They merge simply to create bigger companies — because bigger companies mean bigger rewards for the executives who cut the deals.

Those executives whose companies get swallowed walk away with lush golden parachutes. The execs who do the swallowing get larger paychecks because they have larger companies to “manage.”

Only the foolish among these executives, of course, actually do much managing. The more clever just keep cutting deals. Nonstop “multibillion-dollar buyouts of rivals” have, for instance, boosted Larry Ellison, the CEO of Oracle business software, to a $27 billion personal fortune, America’s third-largest.

Hewlett-Packard CEO Mark Hurd is catching up quick. He wheeled and dealed 31 mergers in the 46 months after he became the H-P chief in 2005. Last year Hurd collected just under $40 million in salary and new stock incentives — and gained another $25.8 million from incentives collected in previous years.

Wall Streeters who specialize in “mergers and acquisitions” — the M&A crowd — have as much a vested interest in buying and selling companies as corporate execs. Bankers take a percentage cut of every merger deal.

That percentage varies. The bigger the street rep of the investment banker, the bigger the fee. One study by Federal Reserve analysts, published in 2002, found that merger fees, overall, average 1.2 percent of total transaction value.

In the six-year period that study examined, Goldman Sachs collected $2.7 billion in merger fees. The four other top merger advisors, over that same period, took in another $6.5 billion.

For individual investment bankers, the M&A rewards can be enormous.

Consider superstar banker George Boutros of Credit Suisse Securities. We don’t know exactly how much Boutros is going to take home from his work on Oracle’s recent $7.4 billion takeover of Sun Microsystems. But we do know that Boutros personally pocketed a $40 million payday when he bargained the $20 billion merger that fused telecom powers Ascend and Lucent.

Last year’s global financial meltdown put a crimp on the M&A fee revenue stream. But the M&A boys have come right back. In November, the monthly global M&A volume hit $305 billion, a big jump from earlier in the year and not far off the $384 billion monthly average record set in 2007.

And the good news — for the M&A crowd — just keeps coming. The November merger deal totals don’t include the $30 billion deal, announced earlier this month, that will give cable giant Comcast a majority stake in NBC Universal. A full third of major corporate chiefs, notes a new Ernst & Young survey, plan to cut a new merger deal within the next 12 months.

All this merger wheeling and dealing will add billions into the pockets of the executives and bankers who cut the deals — and cost workers and consumers billions more.

At a time of record joblessness, more jobs will disappear as newly merged companies ax newly “redundant” workers. At a time of tight family budgets, consumer prices will climb as newly merged firms exploit their more dominant market share and flex their marketplace muscles.

The financial sector reform legislation that passed the House of Representatives last week offers consumers some much-needed protection from the credit card and mortgage-lending games today’s financial giants so enjoy playing. But the new reform bill does nothing to limit the mighty rewards that merger games can bring to the bankers and executives who play them.

We need more reforming. Until we have it, those games will continue — and workers and consumers will continue to lose.